UK property market remains ‘challenging’

By Bridging Loan Directory -

 

Despite “pro-business” fiscal policy changes in the budget, prospects for the UK property market remain challenging this year according to Colliers International’s latest Real Estate Investment Forecast.

Colliers International’s All Property total return forecast for 2012 has been revised downwards to 2.9% from 5.4% in Q4 11. Capital values are expected to contract 3.2% as supply of secondary property outstrips demand from investors. However, the All Property total return is expected to achieve 7.7% pa over the time horizon of 2012 to 2016.

Risk aversion is still evident in the bond market. After being placed on “negative outlook” by Fitch Ratings in mid-March, UK gilts rose 30 bps to 2.4%, but later fell to 2.2% on 29 March as concerns still linger about the eurozone.
The OBR expects unemployment rates to peak at 8.7% later this year, potentially leading to occupiers rationalising their property requirements.
Over the first 11 weeks of the new year, only GBP5.4bn worth of deals have completed on 189 transactions, down from GBP7.1bn on 296 transactions over the same 11 weeks last year.
Overseas investors are the highest net investor type for the fourth consecutive quarter. Overseas investors have purchased GBP1.3bn more than disposed of so far, concentrating mostly on Central London offices as well as prime retail shops.
Surveys taken on Christmas spending show that the British consumer planned to maintain or lower spending on the previous year, yet retail sales by value were up 6.2% and by volume up 2.6% y/y in December.
Retail footfall rose by 1.8% more shoppers between November and January in comparison to the previous year. Prime London occupiers continue to compete for top end locations as supply is limited.

• The office sector investment market has started the year the strongest since 2008 with just over GBP3.2bn in transactions, significantly higher than the GBP2bn seen over the same period last year.
Central London take-up dropped 18.5% in 2011 from the previous year as take-up in the City fell to 4.7m sq ft, its lowest annual level since 2003.

• Investment in the logistics and industrial sector finished off 2011 with a strong Q4 that saw GBP1.4bn traded, while the first 11 weeks of Q1 12 has seen transactions of about half that amount, at GBP697m.

Rahim Jiwani, Property Economist at Colliers International, says: “The trend of overseas investors taking the lion’s share of Central London assets has continued. They are the highest net investor type for the fourth consecutive quarter. Overseas investors have purchased GBP1.3bn more than they disposed of in Q1 12, concentrating mostly on Central London offices as well as prime retail shops.

“Central London take-up dropped 18.5% from 2011 as City take-up fell to 4.7m sq ft, its lowest annual level since 2003. With falling profitability affecting headcounts at banks, the City occupier market saw technology, media and telecommunications (TMT) companies drive demand, with 24% of total take-up compared to 22% by banking and financial as well as business services.

“Prime London retail occupiers continue to compete for top end locations as supply is limited. The prime-secondary yield gap will likely widen further as more secondary property cash flows come under pressure from lowered occupier demand. Colliers International forecasts rental values to contract by 1.4% for the sector, with shopping centres seeing the largest drop off in rents, followed by the high street. Yields will likely soften 20-30 basis points, except for supermarkets which should remain at 5% by the end of the year. In 2012, the retail sector’s solid income return is expected to be offset by drops in capital values, but should recoup some capital losses in 2013 as the economy strengthens.”